Transitory Inflation – Really?

Source: Bloomberg, Unigestion, as of 23.09.2021

American economist Robert J. Gordon posits three major sources of inflation. In his famous “triangle model”, he identifies:

1) “demand-pull inflation” which results from excess demand following an increase in household spending or consequent fiscal support;

2) “supply shock inflation”, which is caused by a drop in available goods resulting from a climatic, technological, geopolitical or other shock;

3) “built-in inflation”, which reflects the interaction between economic agents, who will try to compensate for any real or expected future price increases by raising wages for households or prices for businesses. This factor, also known as the “price/wage spiral”, is strongly linked to inflation expectations.

All three components are on the rise in our proprietary Inflation Nowcaster and display a diffusion index above 50, highlighting that a sharp and sustained decline in inflationary pressure is unlikely in the near term. As our chart shows, despite the Fed reiterating their view that the inflation shock is transitory, the current situation remains exceptional in its magnitude.

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